Geithner Is Done

He has bothered me since he was first announced as the Candidate to head the US Treasury. He always struck me as Paulson-Light. He was put in place to protect the Bank Shareholder at the expense of the US Taxpayer.

His appointment was a sick joke from Day 1. How the heck does a tax cheat end up running the IRS? Ridiculous! How can there be any integrity under those circumstances?

Bernanke and Geithner testify before Congress that all the banks are solvent. Nobody believes their lies any more. Their policies have been a disaster. The market has crashed. The economy is frozen and in a Depression. At the airport tonight, there are 3 passengers in line and 14 guys scanning luggage. The economy is frozen. To me, that is a Depression.

Too Big Has Failed
In case you missed it on Friday, there was a speech given by Thomas M. Hoenig. Mr. Hoenig is the President of the Federal Reserve Bank of Kansas City. Here is his speech –

http://www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf

This speech is a seminal even. I think it puts Hoenig in line to run the Fed, just as Bernanke’s “Deflation – Making Sure It Doesn’t Happen Here” speech set him up to replace Greenspan.

Make no mistake about it, Mr Hoenig did not just wake up on Friday morning and decide to give this speech. His policy proposals are 180 degrees from what the Obama Administration is pedaling. This leads me to believe that Obama is about to do a Mea Culpa and fire his current advisors.

I expect Geithner to be out of a job in the very near future. He will be replaced by FDIC head Sheila Bair, Paul Volcker or Mr Hoenig (if I had to guess). Summers in gone too. Volcker will get one of these two jobs.

At some point, Obama will have to give in to the reality that his policies are wrong and harming the country and its citizens. The sooner he does, the sooner the economy recovers. If not, then the Depression becomes his Iraq War, where the President is a prisoner to his ideology and drives the Nation off of a cliff.

Here is some of what Mr Hoenig said. Tell me if it reminds you of what I have been saying for the last 7 months. The solutions are obvious. We just need a leader with some guts to take on the interests of the Banking Lobby and begin the heavy lifting –

“We have been slow to face up to the fundamental problems in our financial system and reluctant to take decisive action with respect to failing institutions” (page 2)

“We understandably would prefer not to “nationalize” these businesses, but in reacting as we are, we nevertheless are drifting into a situation where institutions are being nationalized piecemeal without resolution of the crisis.” (page 2)

“Any financial crisis leaves a stream of losses among the various participants, and these losses must ultimately be borne by someone. To start the resolution process, management responsible for the problems must be replaced and the losses identified and taken. Until these kinds of actions are taken, there is little chance to restore market confidence and get credit markets flowing. It is not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery.” (pages 4-5)

“When examining previous financial crises, in other countries as well as in the United States, large institutions have been allowed to fail. Banking authorities have been successful in placing new and more responsible managers and directors in charge and then recapitalizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayer has been larger.” (page 5)

“…TARP began without a clear set of principles and has proceeded with what seems to be an ad hoc and less-than-transparent approach in the case of banks judged “too big to fail” (page 7)

“Resolving the Current Crisis”

“First, the losses in the financial system won’t go away – they will only fester and increase while impeding our chances for a recovery”

“Second, we must take a consistent, timely, and specific approach to major institutions and their problems if we are to reduce market uncertainty and bring in private investors and market funding.”

“Third, if institutions -- no matter what their size – have lost market confidence and can’t survive on their own, we must be willing to write down their losses, bring in capable management, sell off and reorganize misaligned activities and businesses, and begin the process of restoring them to private ownership.” (page 9)

“Our bank resolution framework focuses on timely action to protect depositors and other claimants, while limiting spillover effects to the economy. Insured depositors at failed banks typically gains full and immediate access to their funds, while uninsured depositors often receive quick, partial payouts based on expected recoveries.” (page 10)

“These options focus on transferring important banking functions over to sound banking organizations with capable management, while putting shareholders at failed banks first in line to absorb losses.” (page 10)

“Shareholders would be forced to bear the full risk of the positions they have taken and suffer the resulting losses.” (page 11)

“In fact, for failed institutions that have proven to be too big or too complex to manage well, steps must be taken to break up their operations and sell them off in manageable pieces.” (page 12)

“If an institution’s management has failed the test of the marketplace, these managers should be replaced. They should not be given public funds and micro-managed, as we are now doing under TARP, with a set of political strings attached.” (page 13)

“The issue that we should be most concerned about is what approach will produce consistent and equitable outcomes and will get us back on the path to recovery in the quickest manner at a reasonable cost.” (page 14)

Rallies Keep Getting Sold

It has been a few days since I posted, because I have either been in meetings or traveling since Wednesday.

I am now back in town and want to go over a few things.

First – No More Voodoo
My bread and butter is interpreting price and volume. I can tell when stocks are being accumulated and when they are being distributed. I buy when and what Big Money is buying and sell when and what they sell. This requires a lot of work each and every night, but it has kept me out of the Bear and will get me into the Bull.

Elliott Waves and retracement levels are great theory, but if Big Money wants to sell, they will do it. Regardless of whether or not there is potential support. That means that if Big Money wants to take out the 2008 Low on the NASDAQ, then it will and there is nothing that can be done to stop it. We’ll see how the NASDAQ trades the next few weeks.

Right Now, Big Money Is Selling
This may change when I walk into the office in the morning, but the selling is obvious. Every rally (they last an hour or so) is sold hard.

The selling now may include those who wrote insurance on failed banks and insurance companies shorting the stocks of these same companies to protect themselves from the potential bankruptcy of these banks.

Pessimism
There is now a general defeatist attitude amongst those who have held the entire way down. The pundits on CNBC continue to call “Bottom” everyday, but now the hosts laugh at the absurdity of their proclamations.

The market will not bottom because somebody wants it to. It will not bottom on one day. Bottoming will be a process of many months and a lot of fear. Markets NEVER bottom during good news.

Elliott Wave Counts and Fibonacci Levels

A buddy of mine asked me about Elliott Waves and Fibonacci Levels, so I thought I would post about where I think we are in the Wave Count.

If you are into this stuff, then feel free to read it. If you think it is voodoo, then enjoy a good laugh… But keep in mind that the markets have had very thin volume the last few months and these levels have been used by the Hedge Funds and traders to accelerate price moves.

You can read about the Elliott Wave Theory here –

http://en.wikipedia.org/wiki/Elliott_wave_principle

I think we are in Wave 5 of the move off the October 2007 High.
There are clusters of support levels at 664/667, 693/698 and 640/645

Within the larger Wave 5, I believe we have started Wave 4.
The upside resistance levels are clustered at 762/763 and 784/788.
Big chart resistance starts in the 815 range.
Wave 2 of this leg lasted 14 trading days, so we may be in a rally, or a lateral consolidation for a few weeks, before the final leg down for this Bear Market.

Other key levels –
123% retracement of the 2000-2002 Bear Market is at 611
62% retracement of the 1982 – 2007 Bull Market is 663

A rally into the 750-800 range leaves a massive cluster of support at 663,664/667, 661/666 and 654/656
That may be the final support level for the Bear Market of 2007-2009.
Time will tell, but I will be looking to buy reversals off of that level in about 20 trading days.
If 660 fails, then the next support lies in the 611, 611 and 615 cluster.

I'll update these numbers if it is Wave 4 and it does fail.

More on the TALF

I got a reply letting me know that I was overstating the pricing of the debt to be purchased by the TALF.

The way the TALF is written, it will not be able to purchase old debt, only newly created debt. It will protect the Taxpayer by buying ABS at a discount to its maturity price and by charging what amounts to a fee each year for lending the money.

Whether or not the TALF purchases ABS at Par or at a Discount is not the issue. The issue is that the underlying holdings of the ABS will be artificially priced too high and the Interest Rate charged on the loans that find their way into the ABS will be at artificially low, relative to the actual risk of the loans.

If the loans were properly priced for risk, then the interest rates charged on the underlying loans would be so high, that the borrower would refuse the to take the loan. This game of using derivatives or rigged "Credit ratings" to artificially lower interest rates is exactly what got us into this mess.

The fact is that the only entities willing to refinance Mortgage ABS are the US Government or banks who have received money from the US Government. The only way to attract Private Capital would be to price the new ABS with really high interest rates, to reflect their true risk.

But if you refinanced new mortgages at 10%, nobody would be able to afford the loan and they would not buy the house.

So the Fed will overpay to refinance Trillions of Dollars worth of crap off the balance sheet of Banks and move the risk of this filth onto the back of the Taxpayer. I don't think that is an exaggeration.

Feel free to email me and I appreciate you taking the time to reply.

The Fed Is Now A Hedge Fund

Actually, thanks to the TALF, it is the Federal Reserve Bank of New York (FRBNY) that is now a Hedge Fund.

You knew this was coming. It was telegraphed last year by Paulson, when he first started to mention “The Super SIV” (think a gigantic Enron). I have been writing about it for months. Geithner’s appointment guaranteed its enactment.

Today the details of The TALF were announced. I want to deconstruct TALF, because it will be the tool used to reflate the Financial System, with the last, epic round of massive leverage.

TALF – Term Asset-Backed Loan Facility
First, an “Asset Backed Security” is created when a bank takes a bunch of loans, pools them together and then turns the pool into a security - splitting it into shares and selling them at a specific price per share. Assets types include mortgages, student loans, auto loans, construction loans, commercial real estate loans, credit card debt, consumer debt …

Asset Backed Securities (ABS) had one glaring flaw – they were priced by the Rating Agencies (S&P, Moody’s) as if the underlying loans were of the highest credit quality, with minimal potential for future defaults. This allowed the banks to issue these loans at artificially low interest rates. It also allowed banks to make loans at artificially low interest rates, relative to the real risk of default by the borrower.

Remember what I told you last week, that banks are pricing this ABS at artificially high prices, so as to make themselves look solvent. But we know that the highest “Rated” stuff is trading at 32 cents on the dollar and the “Junk” stuff is trading at 6 cents.

Bring on the TALF!
The TALF is now under the management of the FRBNY (the bank Geithner used to run). It has been created in the following structure. The Fed will take $20 billion of TARP funds and loan them to the FRBNY. The FRNBY will leverage that money 10 to 1 and buy $200 billion in newly-created loans.

That’s right, the FRBNY is going to invent $180 billion via the Fed (+ $20 billion more via the US Taxpayer) to buy loans that the banks can’t sell, because the yields are too low (prices are too high) to attract any other buyers! We all know that if the banks priced the new ABS to sell at market, then it would be at rates so high, that they could not do any lending.

Remember, the Obama Administration wants to do another round of TARP (TARP II) for $750 billion. That would allow them to buy $7.5 Trillion of loans. They also have at least $200 billion of TARP I funds left. So you would expect to see the FRBNY end up with a pool of about $10 trillion in loans on the books…

The Goal of TALF
TALF is ultimately designed to transfer the junk loans from the balance sheets of banks to the balance sheet of the US Taxpayer.

How
Remember, TALF is only designed to buy newly issued ABS. So the first wave of purchases will be ABS created by refinanced mortgages.

Here is the game they are trying to play -
Bank A has $100 million in a Mortgage ABS
At origination, the average house value was $500k (2,000 mortgages in the pool)
The mortgage was a Neg Am loan, and is now worth $550k
The borrower financed 100% of the purchase price
The minimum payment was made each month
The house is now worth $300k.

The Fed has continued to allow the bank to price the ABS at $100 million
The ABS still holds a AAA rating
The Market knows that the Bank owns this stuff and is factoring the value of the ABS at $6 million

Under TALF, the homeowner will be allowed to refi their mortgage at 4.5% and stretch the term of the mortgage to 40 years. All appraisal requirements will be waived on these new mortgages. You paid $500k for a house and your mortgage is now $550k, but the house is only worth $300k? “No problemo” says Uncle Sam, we will refi the whole balance! No questions asked. Just sign here!

You now have the bank getting repaid $550k cash, on a loan that is about to recast, and put the homeowner into foreclosure. The bank should have to repo the property and sell it at auction for $250k. But the TALF is stepping in to put the Taxpayer on the hook for $550k.

This is a de facto government subsidy to the bank for $300k per mortgage, or $60 million on this $100 million ABS.

The FRBNY will try and buy all of the crap held by the US Banks, European Banks and Central Banks of places like China and Japan.

Why the Urgency?
The Reason this is going on right now, is because there is an enormous wave of Alt-A mortgages recasting in 2009 and 2010. The size of this mortgage recast dwarfs the size of the Sub-Prime default wave of 2007-2008.

The Fed needs to get this stuff out of the banks, credit unions, pension plans and insurance companies before the coming defaults make all of these institutions insolvent.

So I expect to see the Fed soon use the TALF to buy existing ABS loans off the balance sheets of banks at ridiculously high prices, relative to the real value of the paper held in each ABS (100 but worth 32 or 100 but worth 6).

Either way, the Taxpayer is going to get royally hosed.

What to Do?
If TALF works the way I think it will, then you should see an enormous rally in the stocks of the banks that survive the next few weeks.

This will be the greatest theft of taxpayer money in the history of mankind. But it will put a bottom in on the stock market and lead to a multi-year rally before the US Dollar and US Treasury Bond collapse.

This Chart Says It All

Here is a chart of the rally in the Dow from August 1982 – October 2007
The rally took 25 years. The Dow gave back more than half of those gains in 17 months. 17 MONTHS!!

The Dow has now taken out the key 50% retracement level at 7504. I think the most likely scenario is at least a test of the 62% retracement line, at 5,919. If it occurs, I would expect to see price overshoot 5,900 and test the 5,200 - 5,500 range. But I would then expect to see The Dow close the month above 5,900. We’ll see how it plays itself out.

Bottoms occur in emotional panics. The last few days should be sharp, violent plunges. You do not want to be guessing on the bottom during these days, because you can be a day away from price in time and still be 10-15% away from the bottom in price.

Here is a chart of the Dow from 1996 – Present. You can see how many times the 50% retracement line (Black Solid Line) was tested (Black Arrows).

The last test led to a quick rally (Green Arrow) up into the 38.2% retracement line (Dashed Black Line). This rally failed quickly and the Dow has now taken out the 50% line (Blue Arrow).

Next stop sure looks like the Orange Box.

Weekly Bands
The first big drives down stopped at the -35% Band (Orange Line). That line is currently at 625.7 on the S&P 500. That is a long way below here.

Obama Nukes Healthcare

Healthcare
On February 18 I wrote the following about Johnson & Johnson (JNJ) –

“Johnson & Johnson (JNJ) is the single scariest chart in the stock market. If I shorted individual stocks, I would have a BIG short position in JNJ. I would be looking to add on a rally into the $62 range and a retest of the highs near $70. But I don’t short individual companies, so this is an academic exercise.”

I wrote this because I was not only concerned about the company, but I am terrified of the fundamental prospects for the industry. For months, I have been wondering how anybody could invest in Healthcare, when you know that Obama is on the warpath to nationalize it…

JNJ was down -8.4% the last two days.

This week Obama released his Budget proposals and he crashed the Healthcare stocks. Healthcare is the second largest group in the S&P 500 (15.3%), so when it crashed, the market took another leg down too.

Here are a few charts to show you what the Institutions think about holding onto Healthcare stocks –

US Healthcare Index ($DJUSHC)

US Pharmaceuticals & Biotechnology Index ($DJUSPN)

Health Insurance
Humana (HUM)

Review some of these charts if you want to see how bad the damage is to the Healthcare this week –
Amgen (AMGN), Abbott Labs (ABT), Pfizer (PFE), Celgene (CELG), Covidien (COV)…

Continue to focus on Preserving Capital!